We've all heard about Corporate America's still-growing mountain of cash. But in relative terms, Corporate Canada is sitting on Mount Everest.
Indeed, Canada's corporate stash is so big that if even a small fraction of it were deployed, it could significantly enrich investors and jump-start the country's economy all at the same time, argues Capital Economics.
Paying dividends
"Corporate businesses are flush with cash, which they still seem hesitant to deploy, presumably due to the uncertain economic outlook," said David Madani, Canadian economist for the London-based research firm. "This obviously leaves scope for firms to increase dividends, which could boost personal income and consumption significantly."
In a recent research note, Mr. Madani said Canada's non-financial-sector corporate cash balances stood at $526-billion at the beginning of 2012 – up 42 per cent since the recession ended in mid-2009. Since the Canadian economy is roughly one-tenth the size of our U.S. neighbour, this Canadian cash pile, in relative terms, dwarfs the roughly $1.3-trillion (U.S.) in cash held by U.S. corporations.
Dividends have gradually been climbing as a percentage of Canadians' income over the past decade; as dividends have climbed and Canadians have focused more attention on investing, and income investing in particular. Dividends now represent 5.3 per cent of personal disposable income. As a result, dividend increases have become a more significant source for personal-income gains.
If Canadian companies were to spend just 5 per cent of their cash hoard on dividends, that would dramatically increase total annual corporate payouts, to more than $80-billion (Canadian) from the current $56-billion. Mr. Madani calculated that this would boost personal disposable income by 2.5 per cent. Even if they were to spend only half that amount on dividend increases – 2.5 per cent of their massive cash pile – personal disposable income would still gain more than 1 per cent. That kind of disposable income gain would significantly accelerate consumer spending and investing.
Corporate misers
Of course, there are other ways corporations could use extra cash to fuel growth, rather than pay their shareholders – but they haven't been doing that, either. "Firms have been unusually reluctant to use [profits] to fund fixed capital expenditures," Mr. Madani wrote. As a result, he said, the gap between undistributed profits and capital spending has widened dramatically. "If firms aren't going to spend the funds, then transferring the money to shareholders would at least get the money circulating back into the economy again," he said.
David Parkinson